Dividends in Stocks - Meaning, Payout Ratio, Types & How to Calculate

What is the dividend?

A dividend is a reward that companies offer to their shareholders for contributing to the growth of their company. A company has no obligation to pay dividends to its shareholders, but if there’s no scope for expansion or growth, companies prefer to share a portion of their profit with their shareholders.

Most companies prefer to reinvest the majority of their profit in R&D (research and development) for future endeavors or in expansion.

A dividend is a portion of the profit remaining after deducting the company’s essential expenses and hence, it differs from company to company.

Here’s how dividend per share is calculated:

Dividend per share = Total dividend available for distribution ÷ Total number of shares issued

Impact of dividend on share price

Once the dividend is paid to the shareholders, the share price of the company falls by the dividend amount paid on a share.

Example: The ITC share price on May 21, 2025, was ₹433. On May 22, 2025, ITC declared a dividend of ₹7.85 per share, bringing down the share price to ₹426.

Who is eligible for dividends?

On announcement of dividend, a particular date is selected as the “record date”. Investors holding shares of the company on that record date are eligible to receive dividends on their shares.

Tax applicable on the dividend received

As per Section 194 of the Income Tax Act 1961, dividends received by shareholders are taxable as “income from other sources”. Companies deduct 10% TDS on dividends exceeding ₹10,000 when paying out dividends. Further, the dividend received is taxable income for the investor at applicable tax slab rates.